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Indian summer

The Indian stockmarket has had a torrid start to the year but the region continues to curry favour with investors.

The MSCI India index has fallen by 25.85 per cent over the calendar year to April 10 but longer-term performance remains impressive, with the market up by 134.72 per cent over three years and 353.75 per cent over five years.

Rather than viewing the recent slump as the start of a longer-term malaise, many commentators see it as a buying opportunity.

Hargreaves Lansdown head of research Mark Dampier says: “We have had a decent correction which is probably just what we need. India is a long-term story and many investors will be looking to buy into the falls.”

He notes that recent fund launches by Jupiter, New Star and Melchior could benefit from their timing.

Fidelity India focus fund manager Arun Mehra is confident of the longer-term picture. He says: “Market valuations are looking attractive after the recent correction in the Indian markets. I believe that the economic fundamentals remain intact and growth will continue to be robust.

“This will continue to drive corporate earnings. I am finding a lot of opportunities to buy stocks in which I have high conviction over the long term, particularly in the bank, automobile and information technology sectors.”

Many concerns over the outlook for emerging markets have focused on the potential impact of a US slowdown.

Jupiter India fund manager Avinash Vazirani says in terms of the economy, the impact will be negligible because it is insulated from the US to a large extent.

The Indian economy is primarily domestic. Exports account for less than 18 per cent of GDP, with exports to the US around 5 per cent of the total. This means only around 1 per cent of India’s GDP depends on direct exports to the US. Overall GDP growth for India is still forecast to be between 7 and 9 per cent this year.

Yet sentiment and fact do not always move in tandem, as Vazirani recognises. He says: “Stockmarkets can be driven by sentiment, so to some extent the behaviour of all stockmarkets can be correlated in the short term. In the modern world, decoupling of sentiment across major markets is virtually impossible.

“Economies, on the other hand, are driven by fundamentals. In India’s case, these remain sound, with relatively low levels of personal and corporate borrowings, interest rates which can be cut to boost growth if needed, high levels of domestic demand and a diverse range of companies which are extremely well placed to benefit from India’s continued growth.”

Dampier points to the strength of corporate earnings and notes that India has no sub-prime exposure, with little leverage in the banking system.

Mehra says that big infrastructure development projects planned for the near to medium term will act as a catalyst for growth while India’s outsourcing companies could benefit from cost pressures resulting from the US slowdown.

However, a number of downside risks remain. Inflation hit a three-year high of 7 per cent last week and the Reserve Bank of India will have to juggle the inflationary pressures of oil rising to a record $112 a barrel and on-going food price inflation.

The growth of the Indian middle class, supported by strong job creation and wage rises, have partly offset the impact of this but it remains a threat to consumption.

On the macro level, the strength of the rupee is also putting pressure on exporters. Mehra says: “The appreciation of the rupee against the dollar and a slowdown in US demand will have an impact on export sectors such as information technology.”

Vazirani says he believes the market offers value overall but the prices of companies in some sectors have not yet come back far enough. He says: “The only sectors which I am not currently keen on are industrials, which are still too expensive despite the fact that prices have come off sharply, and utilities, where prices also need to come off even further to gain my interest.”

Dampier says India has the best demographics in the world and with corporate earnings remaining robust, investors need to look through the recent volatility.

“We remain very keen on India and I think that in 10 years time, there will be a lot more India funds in the market,” he says.

New Star and Jupiter might be late to the party compared with the likes of HSBC and JP Morgan but expect to see many more fund managers launching into the region in the next few years.


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